New Hubs Arise to Serve ‘Just in Case’ Distribution

A terminal in Haslet, Tex., near the location where Amazon is developing a distribution center.Credit
Brandon Thibodeaux for The New York Times

Major storms like Hurricane Sandy and other unexpected events have prompted some companies to modify the popular just-in-time style of doing business, in which only small amounts of inventory are kept on hand, to fashion what is known as just-in-case management.

The shift has led retailers and logistics companies to alter supply chains by adding distribution hubs, according to the CoStar Group, a real estate research firm in Washington. In turn, the hubs are creating real estate opportunities in markets on and off established distribution paths, including growth in markets outside the traditional seaport hubs on the East and West Coasts.

Just-in-case planning helps retailers keep merchandise on store shelves in the event a supply chain disruption affects one of the major distribution markets. Hurricane Sandy affected the ports of New York and New Jersey, for example, and the 2002 lockout of International Longshore and Warehouse Union workers from West Coast seaports delayed the unloading of container ships for months.

Just-in-case is a response to the vulnerability of just-in-time supply chains, said Rene Circ, CoStar’s director of industrial research. Since the 1990s, just-in-time has made sense for many companies looking to reduce the cost of keeping large inventories on hand. Technology enabled retailers and manufacturers to closely track and ship items to replace merchandise sold or components consumed in production.

This model also reduced transportation costs, because goods would be shipped only as necessary. By combining the just-in-case with just-in-time strategy, Mr. Circ said, companies are trying to strike a balance between “carrying the minimum inventory possible, yet never running out of things, because inventory equals cost.”

For example, Ranger Steel, a company based in Houston that describes itself as the largest privately owned steel plate distributor in the nation, recently expanded its network of distribution centers. Until the late 1990s, Ranger Steel regularly trucked its heavy steel plates directly from a distribution center at the Port of Houston to customers throughout the United States.

“For a long time that concept worked like a charm,” said Jochen Seeba, the company’s vice president and chief operating officer. “Then you started to see the spike in fuel pricing, and new governmental rules and regulations on insurance coverage for truck drivers that made truck transportation very expensive.”

Like many retailers and wholesale suppliers, Ranger Steel in recent years has added distribution centers to its network, cutting delivery times by moving its inventory closer to customers.

Today, suppliers ship steel in bulk to Ranger Steel’s seven distribution centers around the country. From there, drivers can deliver orders to most of the company’s customers in 24 hours, leveling the playing field with local competitors in markets like St. Louis, where the firm opened a distribution center last year.

Reduced transportation cost is a secondary benefit, Mr. Seeba said. The more significant advantage is the ability to serve and retain customers better in an increasingly competitive marketplace, in which a three-day delivery time to St. Louis from Houston is no longer acceptable. “You have to adjust your model,” Mr. Seeba said, “and that’s what we have done.”

Photo

A crane operator moves containers between rail cars and truck trailers.Credit
Brandon Thibodeaux for The New York Times

With just-in-time management, smaller on-site inventories put companies at greater risk of running out of merchandise in the event of a disruption. Shaw Lupton, CoStar’s senior real estate economist, said companies were trying to mitigate that risk by diversifying supply chains into multiple distribution centers. As evidence, he pointed to a long-term shift of cargo flows from West Coast to East Coast seaports, and a slowdown of the rate at which the largest warehouse markets have captured market share over the past decade.

Some researchers say that retailers, in particular, are under competitive pressure to establish distribution centers near major population centers. Many states have begun to require online retailers to pay sales tax, making it difficult to compete with brick-and-mortar stores on price.

In an effort to gain an advantage, online retailers are increasingly offering rapid shipping from nearby distribution centers, Mr. Circ said. “It’s driving this reconfiguration of supply chains and the building of these large warehouses, not just in a few key markets as it used to be, but a lot more widely spread” across the country, he said.

The closer to the customer that a company can transport its goods in bulk, the greater the efficiency and cost savings, said Tim Feemster, senior managing director at the Dallas branch of Newmark Grubb Knight Frank, a real estate company. Multiple, well-placed distribution centers minimize the time and distance spent on the final leg of delivery, when trucks are often nearly empty while transporting individual items. “The final mile is the most expensive cost per pound or cost per piece,” he said.

Retailers sometimes avoid that final-mile delivery by inviting online shoppers to pick up their purchases from nearby stores, Mr. Feemster said. In those cases, the store functions as a distribution center.

The tendency toward numerous distribution facilities runs contrary to a strategy that was common just after the recession, when some companies sought efficiency by consolidating warehouse operations, according to Bob Martie, executive vice president for the New Jersey region at Colliers International, a real estate service provider.

“As competition is growing, companies are seeing the need to have better customer service,” Mr. Martie said. “Five years ago, one might need two distribution centers to effectively manage the country; now that number seems to be five to seven.”

Or more, for the largest online retailers. On Jan. 30, for example, Amazon.com announced plans to open three fulfillment centers in Texas, each measuring more than one million square feet. In 2012, the company introduced the development of fulfillment centers in Dupont, Wash., and in Middletown, Del., and made a half-dozen similar announcements the previous year.

The redesign of supply chains has introduced some new distribution paths. The Hillwood Development Company, based in Fort Worth, will develop two of Amazon’s fulfillment centers in Texas, including one at AllianceTexas, Hillwood’s 17,000-acre master-planned community north of Fort Worth that is a nexus of rail service, airfreight and highway access. The second will be near Dallas, in Coppell; USAA Real Estate Company is developing the third center just northeast of San Antonio.

Plenty of companies need to establish and maintain distribution centers in smaller markets, too, according to Benjamin Butcher, chief executive of STAG Industrial in Boston. STAG owns and manages more than 29 million square feet of single-tenant industrial properties in 31 states.

Mr. Butcher said that companies were generally reluctant to make major adjustments to an established supply chain. “In the tenants we’re dealing with, there is a lot of stability,” he said. “They don’t tend to move unless there is a fairly strong and valid business reason to do it.”

Correction: February 12, 2013

An earlier version of this article referred incorrectly to a business development in Texas. It is called AllianceTexas, not Alliance.

A version of this article appears in print on February 13, 2013, on page B4 of the New York edition with the headline: New Hubs Arise to Serve ‘Just in Case’ Distribution. Order Reprints|Today's Paper|Subscribe